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Electricity Market Reforms: A Report of Benefits and Costs

Recent Electricity Market Reforms in Massachusetts: A Report of Benefits and Costs

From the Executive Office of Housing and Economic Development & Executive Office of Energy and Environmental Affairs

July 2011

To the People of Massachusetts:

At the direction of the Legislature, we have prepared this report on the costs and benefits of recent state requirements on our electricity markets. We have organized our report on three categories of recent state requirements: 1) energy efficiency; 2) renewables and alternative energy; and, 3) innovation and sector development.

The major conclusions of the report are as follows:

For the past several decades the cost of electricity in Massachusetts, and in most other New England states, has been considerably higher than in the rest of the country. Our higher costs are not related to recent state legislation and requirements, but rather due to the fact that Massachusetts has virtually no indigenous energy resources, requiring us to import almost all of our energy resources from outside the region or overseas. Nonetheless, the three different categories of recent state requirements do create costs and benefits for electricity ratepayers.

Energy Efficiency: Of the recent state requirements, the policies mandating utility company investments in energy efficiency provide the largest cost savings for consumers for the dollars invested. Of all the clean energy programs, they impose the greatest upfront cost, constituting more than 75% of the additional cost imposed on ratepayers, but show returns on investment of the order of $3 savings for each dollar investment. Through these programs residential and business customers are significantly lowering their electricity bills.

Renewables and Alternative Energy: The state requirements mandating that a percentage of all electricity generation be by clean or renewable energy allow utilities to meet these requirements by finding and securing the lowest-cost renewable energy sources. These requirements are producing cost savings for ratepayers, primarily through suppression of the electricity clearing price, that substantially exceed program costs.

Innovation and Sector Development: The state requirements that mandate investments in local energy generation initiatives, including locally-generated solar and offshore wind, do not produce an immediate direct economic benefit to all ratepayers that offsets their costs. Instead, the economic return on these investments also needs to be measured in terms of the number of local employment opportunities created and the non-quantified benefits from diversifying our generation resource away from traditional fossil fuel based sources and incorporating more dispersed local distributed resources in our electricity system. Further study would be needed to provide a rigorous estimate of those employment gains and other non quantified benefits, taking into account any potentially offsetting employment losses in other industry sectors due to higher electricity prices. The available information, however, indicates a rapid growth in local employment to date (on the order of thousands of new jobs and the growth of hundreds of new businesses), and quite a marginal effect of these investments on the overall cost of electricity.

In our opinion, these conclusions lead us to recommend the following further actions:

Energy efficiency programs continue to be and will remain into the foreseeable future the "cheapest new source of electricity." Expansion of these investments by ratepayers will continue to result in long-term savings for residential and business customers.

It should be a continuing priority of state government to partner with our universities and with industry in making Massachusetts a global center for the development of clean energy and energy efficiency innovations that are lower cost than those currently available today.

Our initiatives to increase the percentage of electrical generation by clean or renewable energy should incorporate the opportunities presented by potentially lower-cost energy sources, including on-shore wind in Northern New England and hydro from Eastern Canada, as long as contracts are based on our competitive wholesale market and that transmission costs are not socialized.

On-going data collection should be undertaken to allow continuing analysis of the projected employment gains from the growth of our clean energy industry cluster, taking into account any potentially offsetting employment losses.

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